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Astec Lifesciences

Sharing my summary notes on the company.

What is the outlook for triazole fungicide market? Long term growth potential and near term tailwinds aiding this type of products?

  • Triazole is one of the oldest chemistry. Newer chemistries such as SDHI have come. SDHI has wider applications.
  • Triazole market size: $3bn growing at 3%
  • Top products are Tebuconazole, Propiconazole.
  • Globally China is the largest producer for Triazole. 65% of production happens in China.
  • India is also leading producer. Astec is the largest producer in India. Excel Crop Care is another player in triazole market.
  • In terms of consumption US and EU are biggest. India also consumes 5-7% of global demand.
  • Earlier triazole fungicide was losing market share to SDHI fungicide. But as the fungi has developed some resistance to some of these chemistries, triazole segment is coming back (in a limited way) in form of mixture with SDHI and some other segments.
  • Astec is primarily in triazole chemistry. It does not have presence in SDHI.

Enterprise segment (FY20 Sales: INR420cr)

  • Growth rate should be similar to what the company has been clocking. Higher growth should come from exports.
  • Drivers of growth would be 1) Higher market share gain due to China+1.
  • Astec is a leading player in triazole. Company claims in triazole it is as competitive as China.
  • H2 is seasonally stronger for Astec.
  • For the area where Astec focuses climate is not a major factor. Fungal infection is common in India. So domestic business should have less volatility and dependency on monsoon compared to that seen by some other agri companies.

Is Astec benefiting from China +1 strategy?

  • China + 1 theme been taking place since 2015-16. It is not a new theme. It is only expected to accelerate post pandemic.
  • Astec has gained more business in LatAM, Russia. IN EU, propiconazole was banned. Despite that company maintained its growth in EU. So that tells that ex-propiconazole, it gained business.
  • Japan is not a big market for Astec yet. Japan market may grow inline with rest of the markets. In Japan, Astec is likely to get CRAMS business.

Concentration Risk

  • Client concentration is not there. That is not a risk.
  • Product and chemistry concentration risk is there. It is less of a risk from substitution stand point but more a risk from pricing standpoint if China becomes aggressive and wants to increase its share.

CRAMS Business (20% of top line)

  • High margin business which can grow at 30-35% CAGR over next 2-3 years.
  • Venturing into herbicide now. Will have presence in herbicide and triazole fungicides. Orders for 30-35% of capacity should be there as soon as the plant commissions. Fixed asset turnover may ramp up to 1.6x in 12-15 months time frame when the herbicide plant gets commissioned. INR80cr capex has been done on herbicide plant.
  • Astec is a small player in CMO space but have seen increase in enquires post the onset of Covid-19. Deal closures have not been impacted.
  • These are long term contracts. Pricing is negotiated on periodic basis.

Other details

  • Wanted a B2B business. Astec was under block. Godrej Agrovet has been buying
  • Ashok Hiremath – Self made entrepreneur. He was free to sell after 2017. He needs money
  • He is definitely looking to offload 4-5%. Not sure if he intends to sell completely and exit the business. Second generation from Ashok Hiremath’s family has not joined the business. It is reasonable to assume that Godrej Agrovet will not buy the stake that Ashok Hiremath may sell in near future keeping in mind that Godrej Agrovet had bought at a much lower price and there has been a significant rally in the stock since then.
  • Ashok Hiremath is the MD till 2022. Involved more at strategy level.
  • Arijit Mukherjee, who had moved to Astec close to 5 years back is driving daily operations. Arijit has been associated with Godrej Agrovet since 2005.
  • Company may still go with amalgamation of Astec with Godrej Agrovet. Last year many stakeholders were not happy with amalgamation.

Overall Growth Prospects

  • Capex of 300cr is being done which includes 80-90cr on R&D facility. FCF will be negative for few years as company would invest for growth in next few years.
  • CMO growth will be faster. Herbicide plant will start by Q4FY21 or Q1FY22. Company is on track to launch new products as well and is pursuing programme to reduce dependency on China.
  • Astec is likely to grow top line in mid to high teens and bottom line growth can be higher driven by margin improvement owing to higher mix of CMO business.

Disclosure: 3% position in my equity portfolio

18 Likes

Rs17.39 EPS in 1HFY21 @Marathondreams looks like your FY21E EPS expectations can been delivered in FY20E. Stock has been overshadowed by Mr. Hiremath selling his shares. Maybe now market will look at the numbers delivered rather than his selling shares

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Although numbers look good when compared to last year, I am bit disappointed with EBITDA margin, which dropped from 26% in last 2 quarters to 20% in this quarter. This is mainly driven by increased material cost for the quarter, which has taken away all the benefits of higher sales. It would be interesting to understand from management if this is the trend going forward. Also next trigger would be start of commercial production at the herbicide plant.

But as company starts delivering EPS of Rs 8+ on consistent basis (this is the third quarter having EPS of 8+), which will become EPS of Rs.10+ post herbicide plant, market will start valuing it on higher multiple.

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I think the Q1 margins were not sustainable. There was benefit of lower RM then. The drop in gross margins in Q2 is on expected lines due to lower realization for tebuconazole. Drop in margin due to this factor was mitigated to an extent by higher growth in CRAMS. Over time as share of CRAMS increases, that will support margins. Sales increase is due to higher volumes. There has also been increase in employee expense as the herbicide plant is about to get commissioned.

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ASTEC related notes in Concall of Godrej Agrovet of Q2FY21
a. Global market size for Fungiside- 3.2bn USD. Out of this, Astec- Triazole fungicides is 18mn USD.
b. Astec will introduce new generation of Triazole
c. New Herbicide plant will be complete in Q4FY21. Investment of 85Cr INR. There will be 100% occupancy with new projects.
d. New R&D centre will be complete in Jan.2022 and it will be commercialised. Revenue will start after 2 year since lead time for new product development will be around 2 years
e. Management has given guidance of 20% growth pa.
f. Margin for export contract manufacturing is 25%
g. Capex used in H1 FY21 is 60 Cr… No dependence on external source or Godrej Agrovet
h. Debt to equity ratio is 0.36
i. Export has grown more than domestic in H1.
j. Prices remain stable in contract manufacturing
k. There could be chances of coming orders from PI Industries.
l. Astec Europe 50.5% stake for registration. Registration expired and partner want to acquire hence sold.

4 Likes

My notes for Q2-FY21 concall (https://app.tikr.com/stock/transcript?cid=10530614&tid=539336449&ts=2130782&e=692954678#) It was interesting to see that there were many questions about Astec. I can possibly also Understand why stock has gone down, they practically guided for 10% bottomline growth in H2.

  1. [Topline, Bottomline, Growth, Margins]: Astec Lifesciences posted strong performance with revenue and EBITDA growth of 10.5% and 83.5%. Higher volumes + better realization + preponement of some orders into the Q2 contributed to the growth. 20% Growth YoY for FY21 (bottom line). The contract manufacturing business has a higher EBITDA margin. So that our blended average is about 20%. Herbicides manufacturing, it’s upwards of 25%. Q2 margin has been 20%. H1 has been 22.5%. Given fluctuations in selling prices, 20% is what we can give you the guidance for. And as our contract manufacturing business increases as a proportion of our total sales, this will inch upwards towards eventually 25%, when we get a significant amount of contract manufacturing in our portfolio.
  2. [Triazole vs SDHIs]: What is discovered is that SDHI needs triazole fungicides to be used with them to overcome fungal resistance. So SDHIs are being used along with triazole fungicides. And therefore, the market is stable and growing slowly. We are a relatively small player , we sell about $80 million worth annual. There are some new generation triazoles, replacing the older generation ones and also replacing some of the other classes of fungicides. We are working on those, and we’ll be introducing them in the next 2 or 3 years which will lead to substantial increase in our revenues.
  3. [CRAMS]: Our contract manufacturing business is not restricted to triazole fungicides. We are doing a lot of chemistries other than triazole fungicide chemistry. But because it’s contract manufacturing, it is not publicized. We already have a wide range of chemistries, including grignard & expoxidations & heterocyclic chemistries and some kind of building blocks of chlorine chemistry. Herbicide CRAMS plant is expected to come in Q4 FY '21. We’re investing about INR 85 crores in that plant. And it’s a state-of-the-art plant and it can make a variety of new generation herbicides and intermediates. We see visibility of 100% occupancy more or less of this plant over the next few years. Will really result in total sales turnovers of INR 175 crores to INR 200 crores. We have a range of sulfonylureas, which are being made on a contract basis.
  4. [R&D Center]: All the design work is over, the detailing is over. Groundbreaking by early December & we want to have it up and running by January 2022. Quantitatively, it’s going to increase the number of projects that we can handle simultaneously which is currently the limiting factor. We’ll be able to offer our customers their worth a complete toolbox of chemistries. Customers will prefer us for projects where there are a series of reactions, where we have the expertise to do it. It will attract a lot of the projects. Tere could be large-sized projects & there will be accelerated capital expenditures involved. We’ve already invested about INR 60 crores in capital expenditure this year. Our borrowings have come down to INR 99 crores. Debt equity ratio is about 0.36. Will manage all this with our internal accruals. And so even with an accelerated CapEx program, we maybe have to increase our debt-to-equity ratio to some extent, but we do not have to resort to any external borrowings or any other kind of dependence on Godrej Agrovet for funding these projects. It will certainly start showing results within a year or 2, but the real impact will be a kind of a step jump that will happen over the next 3 to 4 years after its commissioned. With current R&D capabilities we can grow 20% per Annum. We’ve hired more people, and we’ve increased our R&D bandwidth by a factor of about 50% to 70%.
  5. [Seasonality of business]: Traditionally in the domestic businesses in the first quarter demand is always less because in the first quarter hardly there is any crop where fungicide is used.
  6. [Chemistry Skills, Comparison with PI industries]: let’s say that BASF or somebody is looking for somebody who can do a field craft, there’s grignard involved and then there’s nitration and hydrogenation, they look around, they look to PI, they look, who are the people who have the set of skills. And then they will pick a partner. If Astec is good at grignards and this line of chemistry, they will come to us. So the wider range of chemistries that we have mastery over, the more business we will attract. So PI is a little ahead of us on that curve because they’ve been around longer. But by the time this comes, we will develop these so-called technologies, which means we can offer it to our customers, and therefore, these complex multiple synthesis products can be brought into our company. Clients want to derisk away from China and also concentrated suppliers like PI industries. So they are also waiting for our R&D Center to come up. And they are waiting to give us projects.
  7. [Astec Europe]: We had set up Astec Europe and we held 50.5% stake in that, we wanted it to hold some registrations for us. Over the years, the registrations expired, and there was no point in continuing to hold it. And there were operating costs, and they were obviously standing overheads, and it was – so there was – it was making small losses every year. Our partner over there was the 49.5% partner, wanted to acquire the company. And given that there was really not any revenue and businesses, a loss-making company, we decided to sell it him for EUR 1

My 2 cents:
Company has a great growth path forward in next 4-5 years, specially with new R&D center coming up. It’ll be interesting to see if and whether Astec can wrestle some market share from PI Industries as management wants to.

Disc: Invested. Full Portfolio here: Sahil's Portfolio

8 Likes

Are you sure management guided for 20% bottomline growth in FY21E and not 20% topline growth. They have been guiding for 20% topline growth for next 3-5 years.

For 1H profits are 8x YoY. Surely you have misheard what management said in the call.

Even if Astec becomes 50% of PI Industries, it can be a multi-bagger.

Too many things here are too far out in the future. R&D Center is operational by January 2022 - and that is too far out. They are claiming they will enter into newer industries mostly in chemicals - with a lot of capex planned with the idea of clients wanting to de-risk. Everyone wants to enter CRAMS today because of higher margins. If too many enter this CRAMS business, margins may fall.

If we look at PI Industries, they have good execution history, have raised 2000 crore QIP for acquisitions and has a war chest. It may not be easy for Astec to wrestle share from PI Industries, especially when PI has strong relationships with its customers

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Ur two paras above seem to be contradictory - If CRAMS industry is so attractive that everyone is entering because of its higher margins, then how will the client stickiness\customer relationship matters? The relevance of customer relationship\switching costs diminishes as a MOAT if they’re going to switch to a lower cost provider, thus eroding margins for everybody.

On the other hand, if the relationships and execution matters, as in case of PI industries, then there might not be room for many other players in the industry because the customer switching costs will prevent them from changing vendors even at lower costs. In that case, it’ll make sense for the industry to have a bigger player and another co. like Astec to be a No.2 beyond which the industry wont accommodate further players. Can you provide some data\quantitative facts which are evident for any of the scenarios above?

Disc : - Not invested. Trying to understand CRAMS industry and the competitive intensity of the players in it.

3 Likes

@sahil_vi you were right. Mr. Hiremath talked about 20% bottomline growth only. I read the transcripts. It is indeed disappointing. Added to this is the constant share sale by Hiremath. He has sold some more shares. See BSE…

It kind of reminded me of Crompton Greaves where Sudhir Trehan gave a bullish guidance and sold of his stake and then results were not upto the mark…

3 Likes

Today (13 Nov) Ashok Hiremath sold 5.2 lakh shares (of the 14.92 lakh shares he held previously). This is almost 35% of his holding and more than 2.5% of the total outstanding shares of the company.

He has also been consistently selling shares since August this year, almost every week, totalling to over four lakh shares.

So in all, he had sold more than 9 lakh shares in the months. What’s going on?

Screenshot_20201114-003835|281x500 concern

1 Like

He will take a complete exit once the new plant are established and R&D lab is there seems like. Doesn’t seem too alarming if you don’t believe in the Godrej group. He has already sold quite a lot of stake, it’s difficult to find managers in India unlike Usa(what Berkshire has done) to sell a majority of their stake and keep operating the company. A good reputable group is the promoter, just seems like too much noise around Mr Hiremath selling. (Intentions seem clear if we go by the data)

Disclosure: not invested, tracking.

4 Likes

Refer to post by Marathondreams on 29Oct…“Cellular Family Trust”

Sebi Circular is …


Summary - Under the proposed transaction, the trust will acquire 9.94 per cent shares in Astec Life Sciences from Hiremath.

So Hiremath is actually just transferring shared his personal share to TRUST, for succession reasons…but very few in the market are aware and are reading the sale as a NEGETIVE, when this clarity is understood by all , it will start it jouney to its peaks and beyond.

Also, Ashish Kacholia has picked up stake in Sept Quarter.

Significant INFRA investment
A. The commissioning of Hebicides plan which should start revenue of 40-50CR / qrt from Jan21. Also, this wil be CRAMS which has higher margin

B. The RnD center coming up Q4-2021 or Q1-2022, this will really change the nuture of business to more continuos in nature from 2024…

Also, the blended margins of 20% mentioned is more of a guidance. I suppose ASTEC management believe in under commitment and over deliver … Seems like we have exciting next 3-4 year which could also get the revenue, EPS and eventually stock price to significantly Push…

I am not technical with less business knowledgeable , but tried to present a summary in LAYMEN TERMS … Ques - can it be a multi-bagger from here

… my two cents
VP

4 Likes

Sorry but I am a bit confused. If this is a simple transfer of shares, then why are the shares being sold in the open market by Mr hiremath?
See this screenshot from StockEdge app:

Also, Cellular family trust name does not come up in any promoter entities (or even any other shareholders list) on screener:

I understand what the article is claiming, but there does not seem to be any evidence to back that claim.

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Your point is valid and the Astec filing to BSE states that it was a Market Sale. But pls see the SEBI circular which states clearly that 9.94 % of Ashok Hiramath shares are getting transferred to the Trust whose beneficiaries are Hiramath and his family. . The SEBI letter was issued on Oct 16, 2020 and transaction happened on Nov 13, 2020. It is puzzling why they should classify the transaction as market sale.

SEBI | Exemption order under regulation 11 of SEBI (SAST) Regulations, 2011 in the matter of Astec Life Sciences Ltd.

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A the shareholding pattern is based on 30-Sept, whereas these transactions have been placed post that.

The SEBI order also has a breakup of what it would look like… See image

I suppose they haven’t reported Trust side buying as the Cellular Trust is “NOT YET” a promoter or promoter group. When the entire transaction is completed or Dec end Share holding pattern is out, the picture will be all clearer… The devil surely lies in the fineprint :slight_smile:

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I think any transaction above 1 % equity is required to be reported to stock exchanges compulsorily.

Thanks to Sahill for the detailed summary. I have come across this link from SOIC

Here is the full video by Mr. Ishmohit https://www.youtube.com/watch?v=GiLMPs9IrNE

While learning any new subject it is better understand the acronyms in the industry, in that context I tried to learn more details that may help while understanding the business.

Fungicides : Fungicides are used mainly as a preventive rather than a curative measure against the Fungal disease.

Unlike other diseases, fungicides cannot heal symptoms already present, even if the pathogen is killed. Fungicides only protect the new uninfected plant from the disease. There only a few fungicides that have curative properties.

Global Market : Fungicides represent 27.3% market share($16.3billion - Global market share) in the global crop protection market which is valued at $67.6 Billion

India market share : The Indian Market largely consists of insecticides which are nearly 60% of the market, followed by Fungicides which are at 18% and Herbicides which are at 16%. The Indian Agrochemical industry is at an estimated size of $3.04 Billion. Moreover, the consumption of agrochemicals per Hectare in India is lower compared to countries like China, Taiwan etc

Succinate dehydrogenase inhibitors (SDHIs) are active substances used in fungicidal products to control certain fungi and moulds affecting crops. SDHIs prevent their development by blocking an enzyme involved in cell respiration: succinate dehydrogenase (SDH). Eleven active substances from this class are currently used in plant protection products authorised in France.

Astec is mainly into Technical grade chemicals

May be they may expand further in forward integration and there are many levels the chemical grades, at the moment they are at the bottom , there are 6 more grades available ( TAM ??? )

Laboratory Fume Cupboards

Laboratory fume cupboards serve to control exposure to toxic, offensive or flammable vapors, gases and aerosols. Fume hoods are the primary method of exposure control in the laboratory. The laboratory fume cupboard is a type of local exhaust ventilation system (engineering control). A typical fume cupboard is a cabinet with a moveable front sash (window) made out of safety glass. A properly used and properly functioning fume cupboard exhausts hazardous gases, dusts, mists, and vapors from a confined location and helps protect workers from inhalation exposure.

Entering into Flourine Chemistry (Flourine is a chemical we can find in our tooth paste )

one other interesting thing they are working on is building expertise to handle Fluorine Capabilities. Fluorine is a very interesting compound, fluorinated molecules act as building blocks for Pharmaceutical and Agrochemical products. Increasingly what has been happening is that Fluorine is replacing Chlorine in a wide variety of industries, as chlorine is more harmful to the environment. Another interesting aspect about fluorine is that nearly 50% of agrochemicals today contain fluorine and secondly : During 2019, the US Food and Drug Administration (FDA) approved 48 new drugs (38 new chemical entities and 10 biologics). This strengthened the case for fluorine; four of every ten small molecules contained at least one of these atoms. More than a quarter (14 out of 48) of the drugs approved by FDA contained fluorine.

Triazole Fungicides - Market Leader
Herbicides
Insecticides
Pesticides

9 Likes

Received response from company (after some follow up ) about the whole Cellular Trust issue(I asked them why they did not disclose this transaction to the stock exchanges). As per them, the transfer is yet to happen. It seems Mr. Hiremath got permission from SEBI but never executed the transaction. See company response (received from Godrej Agrovet secretarial /legal department ) about Cellular Family Trust and sale by Mr. Hiremath (I asked them whether there is any agreement of Mr. Hiremath’s planned exit after certain no. of years after acquisition) as below

Quote

· Transfer of shares by Mr. Hiremath to Cellular Family Trust:

o As per the Company’s records, transfer of Equity Shares of Astec by Mr. Ashok Hiremath (Promoter) to Cellular Family Trust, pursuant to the order passed by SEBI under Section 11 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SAST Regulations”) (granting an exemption from complying with the requirements of Regulation 3(2) of the SAST Regulations, for such transfer to the said Trust, wherein the said Promoter and his immediate relatives are the trustees and beneficiaries) has not been effected till date.

o The timing and quantum of the transfer to the trust, if to be made, will be purely Mr. Ashok Hiremath’s own decision, within the framework of the said SEBI order and the applicable SEBI Regulations. The required disclosures and due compliance with the SEBI Regulations and the said SEBI order will be made in due course, only if and when the permitted transfer is effected.

· For the sale of shares in the market in past few months:
o As highlighted earlier, the current share sale by Mr. Ashok Hiremath in Astec is for his personal liquidity requirements as per our understanding and is purely his own investment decision. Given the moderate liquidity in Astec, he is selling shares as per his individual judgement of market demand and supply dynamics.

We would like to re-iterate that there is no change in the future plans and business strategy of the Company.

Unquote

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This implies Mr. Hiremath is not too kicked about the future of the company even though he keeps guiding for 20% growth over the next 5 years

1 Like